JP Morgan Chase’s advanced trading systems failed to highlight problems around transactions by fraudster Bernard Madoff before his conviction, according to a major lawsuit.

Leo King
June 29, 2011

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JP Morgan Chase’s advanced trading systems failed to highlight problems around transactions by fraudster Bernard Madoff before his conviction, according to a major lawsuit.

The $19 billion (£11.9 billion) claim, brought by victims’ trustee Irving Picard, is an expanded version of an existing court action and more than triples the original amount being sought. It includes extra evidence, including from experts at another bank who questioned transactions with Madoff’s JP Morgan Chase account.

Madoff, who turned himself in to authorities in 2008, is serving a 150 year sentence for fraud. He was charged with presiding over a near $20 billion Ponzi fraud, which paid returns not from profit but from money paid by subsequent investors. The lawsuit against JP Morgan Chase describes the bank as an “active enabler” of the fraud by supplying services and allegedly ignoring warning signs.

Unusual activity in the Madoff account at JP Morgan Chase “should have triggered [its] automated account monitoring system”, the lawsuit states. JP Morgan has said that it complied with the law and was not aware of the fraud, stating the lawsuit was "meritless" and "based on distortions of both the relevant facts and the governing law".

JP Morgan Chase’s transaction monitoring system “failed to issue alerts even when analysing highly suspicious activities with respect to Madoff” and his former company Bernard L Madoff Investment Securities, the suit says.

The system “almost never issued alerts”, states the lawsuit, prompting “compliance personnel” at the bank to question after Madoff’s arrest why this had not happened.

In March 2008, some $1.1 billion (£687 million) in transactions took place on the account, described by the lawsuit as particularly “high”.

“Remarkably, [JP Morgan Chase’s] transaction monitoring system noted the unusual activity but did not consider it unusual enough to warrant an alert,” it said. “No alert was analysed in March 2008.”

“Our amended complaint shows that JPMC’s bankers literally watched the fraud unfold before their very eyes,” said Deborah Renner, a partner at Baker & Hostetler who is acting on behalf of the trustee.

“[JPMC] could see that money customers deposited into BLMIS’s main account was not used to buy or sell securities,” she continued. “They could see that it was merely transferred to other customers, in patterns serving no legitimate business purpose. They could see millions of dollars routinely bouncing back and forth between Madoff and JPMC Private Banking customers.”

The complaint is set to be heard in the Southern District court of New York.

When the original lawsuit was unsealed, it emerged that JP Morgan traders sent emails in 2007 and 2008 warning of the risk of dealing with Bernard Madoff, according to separate lawsuits against the banks. One JP Morgan employee is even detailed in the lawsuit as telling the risk officer that a simple search on Google would have shown the "well-known cloud" over Madoff.